Crack of Doom: Enron’s Revenge

By now the Citi bailout is almost certainly in the bag, so that should keep everyone busy over the short pre-holiday week.  However, I’d like to get one thing out of the way before everyone starts agonizing over Black Friday and Ben’s mea culpa.

Yesterday one of the local Seattle papers had a speculative piece about WaMu’s recent collapse.[1]

Since the moment Washington Mutual became the nation’s largest bank failure, blindsided executives and devastated investors have spun conspiracy theories about what did it in.

The obvious answer is the implosion of a runaway mortgage market in which WaMu had been a dominant player. Bad loans caused its profits and stock price to crater, and regulators say an accelerating outflow of deposits led them to close the bank Sept. 25.

Yet Oliver Stone-style sleuths are digging for something darker, like regulatory missteps or the federal government sacrificing WaMu to pressure Congress to approve a multibillion-dollar bailout for the financial industry.

 As it happens, the smoking gun is readily available in this 4-year-old PowerPoint deck.[2]

It’s the same old Enron trick of enriching income by quietly goosing risk using off-balance-sheet accounting. This wrong-foots the company when the bubble bursts, just as Fannie’s QSPEs did them in after Lehman pointed out they would need extra capital.  The only real difference is that in this deck WaMu is calling their vehicle an EPF instead of a QSPE.  How many more institutions will be found to have done this once FASB completes Rule 140 reform and forces trillions of dollars to be consolidated back onto balance sheets?  My guess — just about everyone.

[1]: "WaMu conspiracy theories abound, but there’s no smoking gun", by Melissa Allison, Seattle Times, November 23, 2008.

[2]:"Innovative Funding Strategies" (PPT deck), by Michele Perrin, Mortgage Banker Finance, WaMu, at MBA National Convention, October 26, 2004.

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